How to Compare Loan Estimates
Real estate investing is a hot topic for Factora Members. The most common roadblock we hear: what’s the best type of mortgage for my deal?
Keep reading and learn how to compare loan estimates & closing options so you can easily purchase your next property (or three!).
What is a Loan Estimate?
A Loan Estimate (LE) is a 3-page formal document borrowers will receive from a lender within 72 hours of completing a mortgage application. It details the specific terms and conditions of the loan offered. Below is an example.
Let’s Break it Down
The most important sections of an LE are broken out below. These are what you should pay attention to when comparing loan options side-by-side. For a full explanation of definitions for each line of the LE, visit consumerfinance.gov
Basic Loan Summary
The Loan Estimate section includes the basics of your loan: repayment term, purpose of loan, rate type, loan type, and rate lock.
Tip: The Rate Lock (bottom right) tells you how long your quoted rate is valid.
Loan Terms
Your Loan Terms summarize your loan amount, interest rate, and monthly principal & interest payments. This is the easiest section to use when comparing loans.
Tip: It is very rare to see a prepayment penalty or balloon payment (bottom two lines) on a residential mortgage. These could be red flags.
Projected Payments
The Projected Payments section shows a breakdown of your total monthly payment. If private mortgage insurance (PMI) is required, you’ll see two amounts: one before PMI is met and one after it is met. It’s key to compare Principal & Interest and Mortgage Insurance amounts when making your mortgage decision.
Escrow (third line) is an account your lender uses to hold funds to pay your taxes & insurance when they are due. You pay into the escrow account each month and your lender makes the tax & insurance payments on your behalf once a year. The monthly escrow amount is generally the same regardless of lender.
Costs at Closing
The Costs at Closing section gives a brief summary of closing costs. You can use these numbers to compare total costs across loans. You will see a more detailed breakdown of closing costs later in your LE.
Loan Costs
Your LE will break out all costs associated with the loan. The Loan Costs section is what you’ll use to compare loans across lenders, as each have different fee structures that can impact your total payment.
Origination Charges go directly to the lender. Some lenders choose to itemize the various components, while others may show a lump sum “origination fee.”
Lenders may charge points for you to obtain a specific rate. It’s important to check here (second line) for points because lenders are not always transparent about them.
Services You Cannot Shop For are the third-party expenses which the lender incurs on your behalf. They are non-negotiable and lenders are prohibited from marking them up.
Services You Can Shop For may include optional items like owner’s title insurance, hazard and pest inspections, and survey fees. These are usually dictated by your sales contract. Lenders are not responsible for changes in these fees during the course of your closing.
Line D is your total cost to compare across loans. Even with similar rates, loan costs can vary.
Other Costs
In the Other Costs section, make sure to review and understand the responsibilities of your loan, even though they are not likely to vary much from lender to lender. They are primarily driven by your locality, closing date, and sales contract.
The purchase contract will detail whether the buyer or seller are responsible for recording & government fees.
Prepaid Interest is the interest paid from the day of your closing through the end of that month, so your closing date determines the amount of this charge.
Initial Escrow Payment at Closing details how many months of taxes & insurance you will need to pre-pay at closing. Most lenders ask for 2 months of escrow.
Lenders differ in how they use the Other field. Some will include the optional owner’s title insurance. Others may include fees like the home inspection or pest inspection.
A Lender Credit is a reduction in your closing costs, used by your lender as an incentive.
Calculating Cash to Close combines all expenses and credits listed on the 2nd page of your LE.
Closing Costs Financed are closing costs that are wrapped into your loan amount and Deposit is earnest money already paid to the seller. These are both subtracted from the Estimated Cash to Close amount.
Comparisons
The Comparisons section gives you a few quick measures to compare loans, but you shouldn’t look at these in isolation as they don’t provide the full picture of loan costs. APR adds the origination fee and points paid to the interest rate to give you a more comprehensive view of costs, but it still does not include all closing costs. You should be careful to review all costs listed on page 2 of the LE.
Other Considerations
The Other Considerations section generally looks similar for each LE, but review carefully nonetheless to ensure there are no hidden surprises from any lenders.
Topline Items for Loan Comparison
There is no substitute for comparing all LE’s in detail to ensure there are no red flags or surprises from lenders you’re considering. However, the most important items to compare for your return on investment when analyzing multiple loans are:
Interest Rate - Page 1 - Loan Terms
Monthly Principal & Interest Payment - Page 1 - Loan Terms
Origination Charges - Page 2 - Loan Costs - Line A
Total Loan Costs - Page 2 - Loan Costs - Line D
The most important red flags to check for are:
Rate Lock - Page 1 - Loan Summary
Prepayment Penalty - Page 1 - Loan Terms
Points Charged - Page 2 - Loan Costs - Section A
Underwriting Fee - Page 2 - Loan Costs - Section A
Late Payment Penalty - Page 3 - Other Considerations
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